INTERMEDIATE
ACCOUNTING
Chapter 2
Financial Reporting: Its Conceptual Framework
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FASB Conceptual Framework
The Conceptual Framework is intended to:
Guide the FASB in establishing accounting standards
Provide a frame of reference for financial statement
preparers and auditors for resolving accounting questions
in situations where a standard does not exist
Establish objectives and conceptual guidelines that form
the bounds for judgment in the preparation of financial
statements
Increase users’ understanding of and confidence in
financial reporting
Enhance financial statement comparability across
companies and over time
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Accounting Principles
Accounting principles are fundamental theories,
truths and propositions that serve as the
foundation for financial accounting and financial
reporting.
The most fundamental statements of these
principles come from FASB’s Statements of
Financial Accounting Concepts
Also known as Concept Statements
Generally broad and definitional
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Accounting Concepts
FASB’s Statements of Financial Accounting Concepts
are general proclamations that establish:
Fundamental principles of accounting
Objectives of financial reporting
Qualities of useful financial accounting information
Definitions of basic elements like assets and liabilities
Types of economic transactions, events, and
arrangements to be recognized in financial statements
Measurement attributes to use to measure and report
these transactions, events, and arrangements
How transactions, events, and arrangements should be
presented and classified in financial statements
Are the basis and objectives of GAAP
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Accounting Standards
Accounting standards
Establish the authoritative guidance on how companies
should account for and report specific transactions,
events, and arrangements in their financial statements.
Specific accounting standards in GAAP provide
guidance on when and how to recognize and measure
these elements in financial statements.
Within accounting standards, rules exist, which are
specific implementation procedures.
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Relationship of Principles, Concepts,
Standards, and Rules
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Conceptual Framework Projects
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What are the Objectives of Financial
Reporting? (Slide 1 of 2)
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What are the Objectives of Financial
Reporting? (Slide 2 of 2)
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Types of Useful Information for Investors,
Lenders, and Other Creditors
The following types of information are helpful in assessing
the amounts, timing, and uncertainty of expected future
cash flows to a company:
Return on investment – measure of overall company
performance for equity shareholders
Risk – the uncertainty or unpredictability of future profitability
of a company
Financial flexibility – the ability of a company to use its
financial resources to adapt to change and to take advantage
of opportunities
Liquidity – refers to how quickly a company can convert its
assets into cash to meet short-term obligations and cover
operating costs
Operating capability – refers to the ability of a company to
produce goods and services for customers
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Qualitative Characteristics
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Process of Applying Fundamental Qualitative
Characteristics
Step 1 – Identify an economic transaction, event, or
arrangement that needs to be recognized in the
financial statements.
Step 2 – Identify the type of information about that
phenomenon that would be most relevant – material
and capable of making a difference in decision
makers’ predictions of future outcomes/or
confirmations of past predictions.
Step 3 – Determine whether that information can be faithfully
represented in a manner that is complete, neutral, and
free from error.
Step 4 – Determine whether the benefits of that information
are likely to exceed its cost. What are the possible
outcomes?
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Accounting Assumptions and Principles
Certain accounting assumptions and principles have
had an important impact on the development of
GAAP:
Reporting Entity or Economic Entity Assumption
Going Concern Assumption
Period-of-Time Assumption
Monetary Unit Assumption
Mixed Attribute Measurement Model
Recognition
Accrual Accounting
Conservatism
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Principles of Accrual Accounting
The Revenue Recognition Principle – determines the
appropriate period in which a company creates
economic benefits and can recognize revenues in
income
The Expense Recognition Principle – determines the
appropriate period in which a company has
consumed economic resources in conducting
business operations
The Matching Principle – matches the expense to
the period in which the economic benefits are
consumed by generating revenues
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Sources of Information Used in External
Decision Making
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